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California Court of Appeal Affirms That Unlicensed Contractor May Not Pursue Litigation

California’s Second District Court of Appeal recently threw out a potentially valid claim for breach of contract asserted by a contractor which failed to comply with the state’s contractor’s licensing requirements. The case is noteworthy not only for the holding, but also for the prominent defendant, Tesla founder Elon Musk’s SpaceX, a private space exploration company.

(a) Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract regardless of the merits of the cause of action brought by the person . . .

The law acts as a virtually impenetrable shield under which a party sued by an unlicensed contractor may find protection and may repel a lawsuit filed by the unlicensed contractor. Although the law is generally viewed as a consumer protection - which provides relief for homeowners and precludes them from being required to pay unlicensed contractors who perform poor quality work - it applies to both residential and commercial projects. Furthermore, the law may be invoked to bar a contractor’s claim, even if the opposing party knew at the time of signing the contract, or discovers prior to completion of the work, that the contractor is unlicensed. The law is based upon a strong public policy which favors the licensing of construction contractors and which penalizes them for failing to obtain a license by precluding them from pursuing or defending claims in the courts of the state of California.

Although the law is quite draconian, it does provide some relief to a contractor who can prove in a hearing that they were: a) previously licensed; b) attempted in good faith to renew their license; and c) in fact renewed the license immediately upon discovery of any lapse in license status. However, absent proof of these circumstances, an unlicensed contractor has virtually no chance of prevailing in litigation in California’s courts.

A contractor known as Phoenix Mechanical Pipeline, Inc. (“Phoenix”) entered into a contract with SpaceX in 2010, under which it was to provide multiple services, including “plumbing, general maintenance and repair, concrete removal and pouring, trash clean-up and disposal, demolition, car washing, electrical, excavation and installation.” Phoenix claims that it performed services for SpaceX pursuant to the contract and that it was paid, for a time. SpaceX subsequently refused to pay Phoenix for its services and eventually informed Phoenix that its services were no longer needed. SpaceX then demanded that Phoenix’s personnel leave its premises. In 2014, Phoenix sued SpaceX in Los Angeles Superior Court for breach of contract and related claims, asserting damages in excess of $1 million.

Allegations and Challenges

In its original complaint, Phoenix failed to allege that it “was a duly licensed contractor at all times during the performance of” its work under the contract with SpaceX, as required by Section 7031. SpaceX demurred to the complaint, asserting that the complaint lacked the requisite allegation that the plaintiff was properly licensed. Phoenix responded to the demurrer by amending its cross-complaint. It added an allegation that an individual who it characterized as its “Responsible Managing Employee” oversaw all services performed under the contract and that the individual was the owner of another entity, “Phoenix Mechanical Plumbing, Inc.,” which held a valid California contractor’s license.

SpaceX demurred to the first amended complaint, arguing that the new allegations were not sufficient to comply with Section 7031, which requires the “person engaged in the business or acting in the capacity of a contractor” to allege that it was properly licensed and that Phoenix had alleged only that another entity was licensed. The trial court sustained SpaceX’s demurrer but allowed Phoenix to amend its complaint a second time.

In its second amended complaint, Phoenix characterized the individual as a “Responsible Managing Officer” and, tracking language in California State Contractor’s License Board regulations, stated that the individual “supervised construction and related services managed construction activities by making technical and administrative decisions, checked jobs for proper workmanship, and directly supervised construction job sites.” Phoenix also asserted that it was not required to hold a contractor’s license for services provided which were not construction-related. SpaceX demurrered to the second amended complaint filed by Phoenix. This time, its demurrer was again sustained without leave to amend. Phoenix appealed.

Appellate Opinion

The Second District of Appeal mainly agreed with the trial court. The Appellate Court found that neither the explanations provided by Phoenix nor the manner in which its claim was plead were sufficient to overcome the strict requirement of Section 7031 that it be duly licensed in order to prosecute a claim in the California courts. The Court explained that Section 7031 is intended to, “protect the public from incompetence and dishonesty in those who provide building and construction services,” that it “advances this purpose by withholding judicial aid from those who seek compensation for unlicensed work,” and that application of Section 7031 “applies despite injustice to the unlicensed contractor.” Because Phoenix had not plead that it was licensed during the performance of its contract with SpaceX, it could not recover for alleged breach of the agreement regardless of whether it was otherwise entitled to recover for contracting services provided to SpaceX.

The Appellate Court did provide Phoenix with a small victory. It concluded that Phoenix could obtain payment for work done for SpaceX which did not constitute “contracting” work - for which a contracting license is required - based upon applicable legal authorities defining such work. Phoenix submitted separate invoices for each type of work done and alleged that each constituted a separate contract, therefore, findings could be rendered as to which of the tasks it performed for SpaceX did not require a license. The Court of Appeal remanded the case to the trial court for further determination as to the scope of such services.

It should be noted, however, that Section 7031 not only includes a “shield” against affirmative claims, the statute also provides for the recovery of funds paid to an unlicensed contractor. Phoenix may find that its monetary recovery for services which it can prove were not subject to contractor’s licensing requirements are offset by the amounts which must be disgorged due to its unlicensed status. The Phoenix decision proves that an unlicensed contractor might as well do charity work because it may end up donating the value of its services.